QuantumScape Corp Q3 FY2024 Earnings Call

Good day, and welcome to QuantumScape's Third Quarter 2024 Earnings Conference Call. John Saager, QuantumScape's Vice President of Capital Markets and FP&A, you may begin your conference.

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's Third Quarter 2024 Earnings Call. To supplement today's discussion, please go to our IR website at ir.quantumscape.com to view our Shareholder Letter. Before we begin, I want to call your attention to the Safe Harbor Provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial, or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There are risk factors that may cause actual results to differ materially from the content of our forward-looking statement for the reasons that we cite in our shareholder letter, Form 10-K, and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's CEO, Dr. Siva Sivaram; and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva.

Thank you, John. I'd like to begin by discussing the most significant achievement in our Company's history. We are excited to report that we have begun producing low volumes of our first B Sample cells, accomplishing our most important goal for 2024 and we have begun shipping these cells for automotive customer testing. These are B Samples of QuantumScape's first product QSE-5, with measured energy density of 844 watt hours per liter, capable of fast charging from 10% to 80% in just over 12 minutes. QSE-5 represents an important milestone for our Company and the Battery Industry as a whole. These cells are, to the best of our knowledge, the first anode-free solid-state-lithium metal cell design ever produced for next-generation automotive applications. This cell is capable of simultaneously delivering exceptional performance with respect to energy density, discharge power, charging speed, low temperature performance, and safety. This milestone marks a new stage of rigorous development and production efforts. Now that the product design and performance profile is set and we have established a baseline process, we will continue to ship samples, get customer feedback, and refine our processes. During this B Sample phase, iterations of these samples will be subject to extensive product testing, which will take many months to complete. We have to substantially improve on metrics such as cell reliability, yield, and equipment productivity among others. Next, I'd like to share an update on our progress on separator production. The first implementation of our disruptively fast separator production process is named Raptor. And as of Q3, Raptor is now our baseline. We set this as a key annual goal, because Raptor is a major improvement from our last generation technology in film quality and performance, heat treatment time and energy consumption. We expect that Raptor will continue to support our QSE-5 sample output into 2025. Beyond enabling B Samples, Raptor serves as a learning platform and transitional step to our Cobra process, which we continue to see as our best pathway to gigawatt-hour scale separated production. We are preparing for Cobra production to enter our baseline in 2025. We expect Cobra heat treatment equipment will be in place by the end of 2024 and with the addition of higher volume downstream automated equipment, this line will enable a significant increase in separator production. Next, I'd like to briefly update on our joint work with PowerCo, the battery manufacturer of the Volkswagen Group. As a reminder, we have signed a landmark agreement with PowerCo to bring our QSE-5 technology platform into mass production at the gigawatt-hour scale. The first phase of this agreement includes intensive collaboration with PowerCo contributing skilled personnel to aid the industrialization of the QSE-5 platform. Upon satisfactory technical progress in this phase, QuantumScape will grant PowerCo a license to mass produce battery cells in exchange for royalty payments including a $130 million prepayment. The collaboration phase kicked off in Q3, with joint development activities at our San Jose facilities. During this phase of the project, we combine our QSE-5 platform and deep knowledge of solid state battery technology with PowerCo's expertise in scaling up high volume manufacturing processes. PowerCo is well positioned to contribute in areas such as supply chain, production equipment, and automation. Last, I want to put this quarter's achievements in context. This is a proud moment for the entire QuantumScape team. We have accomplished our most important goal. We have started producing B Samples of our QSE-5 product and begun shipping them for customer testing. We believe these cells represent a new high water mark for the battery industry. This is the moment we've been waiting for. The start of the climb towards industrialization. To make the kind of impact on electric transportation, we believe this technology is capable of, we will need enhanced manufacturing processes which can make millions of cells per year, with defectivity rates on the order of a few cells per million or lower. It will require a sustained effort and deep collaboration with partners including the Volkswagen Group and PowerCo to achieve such a massive scale. With those long-term goals in mind, shareholders should take a balanced view of the achievement we have announced today. It is no more than the first shipment of early low-volume QSE-5 B Samples, but at the same time, we believe it is no less than a true world first, an anode-free solid-state lithium metal battery capable of revolutionizing electric vehicle performance. A cell, with the potential to offer what drivers are demanding: much longer range, faster charging, powerful acceleration, and better safety all at the same time. Thank you for your continued support and we look forward to updating you on further progress in the months to come. With that, I'll hand things over to Kevin.

Thank you, Siva. Capital expenditures in the third quarter were $17.9 million, in line with expectations. Q3 CapEx primarily supported equipment purchases for low volume QSE-5 prototype production as well as the Cobra process and other equipment as we prepare for higher volume QSE-5 prototype production in 2025. GAAP operating expenses and GAAP net loss were $130.2 million and $119.7 million, respectively. Adjusted EBITDA loss was $71.6 million in Q3 and in line with expectations. We continue to track to full year guidance for adjusted EBITDA loss. This quarter, we tightened our full year guidance for adjusted EBITDA loss to be between $280 million and $300 million within original guidance, but at the higher end of the original range, primarily due to higher legal fees and settlement accruals in 2024, that we do not expect to reoccur in 2025. We are lowering our guidance for capital expenditures to be between $60 million and $75 million. This lowered guidance in 2024 is driven by realized PowerCo deal-related efficiencies, non-deal-related savings, and a shift in certain payments originally planned for late 2024 into 2025. We ended Q3 with $841 million in liquidity. As we've mentioned previously, our long-term capital requirements are a function of our commercialization pathway. We believe our deal with VW PowerCo offers a capital-efficient path to market and continue to project our cash runway to extend into 2028. Any additional funds raised, including under our ATM prospectus supplement, would further extend this cash runway.

Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors, or that I believe investors would be interested in. Siva, can you elaborate on the significance of QuantumScape entering the B Sample phase of the automotive qualification cycle?

Thanks, John. We hear announcements every day from different battery manufacturers touting isolated improvements or specific performance features. Today we are discussing extensive measurements of our first planned product that we have worked so hard to develop. We believe that the QSE-5 cell is concurrently better in the major performance specifications at the consumers' demand: range, faster charging, ability to operate at lower temperatures, ability to provide high power, and a better safety profile than today's lithium-ion cells. For the first time, you're seeing a battery that can meet all of the above requirements and we are providing actual measurement data for all of these features. When OEM customers deploy our batteries into their vehicles at scale, we believe this combination of characteristics will transform the electric vehicle marketplace by offering a no-compromise alternative to internal combustion vehicles.

So beginning low-volume QSE-5 prototype production is a major milestone on QuantumScape's journey towards industrialization. But what key challenges remain ahead?

John, first, I'm just so pleased that we have reached this stage. We got here through a set of thoughtful, deliberate milestones, starting with our single-layer results in 2020 and progressing towards our first A Samples in 2022 and six layer Alpha 2 prototypes earlier this year. We have communicated to you every step of the way. Now that we have a design that's frozen and a baseline that's running for our first product, this industrialization process follows a well-developed playbook that many industries have used before. In fact, I am excited to be in a familiar place that I have been in several times during my career. We know what we need to do. We need to do systematically, methodically, iteratively, take a product that we have developed at our headquarters in San Jose, and bring that into production of millions of cells that are ultimately deployed in vehicles. This long-term goal will require constant focus on quality, processes, customer feedback, and very close collaboration with our broader ecosystem to achieve gigawatt-hour scale production.

Thanks, Siva. Kevin, turning to you. What is required to achieve the 2028 runway extension? Can you elaborate further on the details behind that?

The 2028 runway extension is the equivalent of more than $0.5 billion of non-dilutive improvement to capital availability in our forecast. There are four primary drivers. First, under the licensing agreement, PowerCo will invest CapEx required for gigawatt-hour scale production facilities. The deal replaces our prior JV structure, which frees up $134 million we had previously earmarked for required capital investments. Second, PowerCo will contribute resources and skilled personnel as part of the collaboration, which helps reduce costs to industrialize our technology platform. Third, the licensing agreement features an inflow to QuantumScape of $130 million royalty prepay contingent upon satisfactory technical progress. Fourth, and separate from the PowerCo deal, we continue to make improvements to the efficiency of our operations, which, as mentioned in our Shareholder Letter, we've already begun to realize. Longer term, the shift to a license with VW PowerCo for up to 80 gigawatt hours, four times the size of the JV agreement, the PowerCo deal replaced, reduces forecast capital requirements to QuantumScape by billions of dollars.

Okay. Thanks so much. We're now ready to begin the live portion of today's call. Operator, please open up the line for questions.

Our first question comes from Joseph Spak with UBS. Your line is open.

Hi, this is Gabriel on for Joe. Thanks for taking my questions. Firstly, congratulations on beginning B Sample shipments and fully implementing Raptor. I know you previously mentioned that you were targeting something like 800-watt hours per liter and that 10% to 80% charge time under 15 minutes. So good to see those metrics there. Siva, we've seen some announcements from some of your competitors intending to launch with their solid-state tech and lower volume fleets around that 2026, 2027 timeframe. But we've also heard expectations for full introduction of solid state as a later decade event. I know earlier you spoke about how QSE-5 stacks up within the competitive landscape. So without setting specific expectations, do you see that timeframe as reasonable for the EV space in general to begin implementing this kind of technology, even if lower volume?

Gab, thanks for asking the question. I will talk for ourselves first. As I said, there are a lot of announcements all the time from everywhere. We believe in systematic, methodical, iterative development of a product from a B Sample into high-volume production. This requires that we take no shortcuts. We make sure we focus on quality, we make sure we focus on the supply chain, our ecosystem, and do this right. And with a partner who knows how to build in volume. All of this does require time, effort, and focus. I can only tell you that we are on the fastest path to production as possible. Our partner and us are both highly motivated to get this path-breaking technology into production in the fastest possible manner. And that's where we are headed. And the first part of getting that started is establishing a baseline that actually delivers all of these, which is what we have established today. We have established that concurrently, we can give you the safety, we can give you better than expected energy density, very, very good power, very good safety, and ability to operate at very low temperatures. Put them all together you have the baseline and we work methodically, systematically, and iteratively, with our customers. That's about all I can tell you. Our customers working very closely with us on this.

Great. That's good to hear. And Kevin, you lowered the CapEx guide about $25 million at the midpoint. So the full-year guide implies about $16.5 million of CapEx in Q4. Is this sort of the quarterly run rate we should be expecting going forward, or are there some costs you expect to incur, such as Cobra spend that won't repeat going forward?

Thank you, Gabe. That's a great question. Regarding CapEx, we lowered our guidance to between $60 million and $75 million for three reasons. The first is related to efficiencies from the VW PowerCo deal. The second is from non-deal-related savings, and the third involves a change in payment timing aimed at moving some expenses from the end of 2024 into 2025. We expect this range of CapEx to continue in the future. When comparing levels in 2025 to 2024, we anticipate them to be flat or slightly decreased, and for the same reasons, we expect OpEx in 2025 to also be flat or slightly down compared to 2024 levels.

Thanks, everyone. Congrats on the quarter.

And your next question comes from the line of Jordan Levy with Truist Securities. Your line is open.

Hi guys, it's Henry on for Jordan here. Congrats on the B Sample milestones. Just to start with, with those Samples now being produced and Raptor are continuously running, I'm just curious, are there any key learnings you guys have found from the continuous running that are being incorporated into the higher volume line, starting next year? Thanks.

Henry, absolutely. What you are asking is exactly what we are doing. The Raptor line not only produces enough samples to run the baseline, but is also the platform on which we learn how to structure, improve, and continuously make the Cobra process better. Even on the rest of the line, it is what you would expect. Running a stable baseline allows you to systematically improve on the performance and you can see the effect. I mean, to come and tell you that we can do 844 watt-hours per liter, 301 watt-hours per kilogram, just over 12 minutes of charge time, operating up to minus 30 degrees with 10C capability and with safety, that is even at a 300-degree thermal stability that is good. This kind of an improvement comes from running a stable baseline.

Thanks for that. And then maybe just one quick follow-up. Kevin, on the readjusted CapEx forecast, are you guys able to talk to what kind of drove the shift in certain payments that you mentioned from this year to next? What was behind that?

Yes, just to put a magnitude to that, that shift was in the single-digit millions. It doesn't change any of the publicly stated milestones for progress and we're very much aligned with both our prospective launch customer and VW PowerCo on the industrialization and tech transfer work. So I would put it in just the normal course of operation.

And your next question comes from the line of Winnie Dong with Deutsche Bank. Your line is open.

Thank you so much, and congrats on the quarter and the news of starting B Sample delivery. Now that you have a few months of collaboration with PowerCo, I was wondering if you can talk about maybe some of the specific issues that they're solving for versus what QuantumScape might be solving for internally for B Sample deliveries and testing with customers. And then secondly, could you guys maybe share any details around the economics beyond the loyalty payment? I understand that there is some sort of share economics beyond the $130 million prepayment that you guys discussed, is there any details that you can potentially offer at this point? Thank you.

Winnie, why don't we take the second question first? Kevin, you want to talk about the economics?

No, unfortunately not anything beyond the redacted contracts we put in place. As you correctly noted, there is a royalty prepay, which gets unlocked with sufficient technical progress of $130 million inflow to QuantumScape. And then once up and running, there are two parts. There's both a royalty rate and then there is an outperformance share. And as is common in the industry, those details between two companies aren't shared so as not to disadvantage either one in future negotiations.

So, Winnie, on to your first question. Clearly, on the second question, look, as much as we can disclose, we have, for many reasons, both for confidentiality between the parties and because we want to retain the ability to negotiate with other customers when we start. So we don't want to put these numbers out. On to your first question as to what Volkswagen's or PowerCo's role in this development is. We come in with a very deep knowledge of the solid-state battery technology itself. The electrochemistry is involved, the materials involved, the processing sequences and parameters. What PowerCo is very, very good at is in scaling up in industrialization of the manufacturing capabilities, making sure that the ecosystem, the supply chain is properly negotiated, put in place, factory ramp up, making sure that the tools and their uptimes and large-scale volume production capabilities in place. Those things they are very good at. And we are both working together as one team with one goal, to take these B Samples into the gigawatt-hour scale factories that we both want to get out as soon as possible.

And your next question comes from the line of Ben Kallo with Baird. Your line is open.

Hi, good evening. And congrats, guys and to echo everyone's congrats to you. Just could you talk a little bit more about moving to Cobra or adding Cobra and how that gets started just on the timing of it and then how we should expect the ramp-up there to meet the more high volume of production? Thank you.

Thank you, Ben. You’ve highlighted a crucial step for us as we transition production from Raptor to Cobra. The primary equipment for Cobra has already begun to arrive. By the end of this year, we will have all the necessary components for the Cobra process in place. Early next year, we will also implement certain high-volume production tools, and this transition will be ongoing as we gradually shift from Raptor to Cobra. We anticipate that Raptor will be the primary source for sample production earlier in the year, and by 2025, the majority of production will have transitioned to Cobra.

I know it's early in sending Sample B Samples out, but is there any feedback from customers or potential customers, or is it too early to tell? How do you expect the customer deal pattern to change with having samples in their hands, if it does change at all? Thank you.

Clearly, having samples in our hand is a great thing for all of us, us and our customers. And as you'd expect, the customer data is going to be very proprietary to the customer and they are not going to allow us to share any of that outside unless they choose to. However, we do measure sister cells and that's where the data that we presented today are all from the sister cells and you can see how thoroughly we have characterized it and given you the data so that we are not just showing bits and pieces of data, just one parameter at a time. We are actually showing you comprehensive data, exactly how it is measured, what the dimensions are, how do we measure energy, power, all of those are. So this is the reason we are able to share the data in that much detail. Customers will, of course, will measure it their own way, with their own specifications and will give us specific feedback that will help us in refining and making the process better.

Thank you very much.

Thanks, Ben.

And our next question comes from Jed Dorsheimer with William Blair. Your line is open.

You got Mark Shooter on for Jed. Echoing everybody else congrats on the B Sample stage gate. That's a big accomplishment. Not to undermine that achievement, but obviously, we're going to look forward a bit. So talking about C Samples, that's where the rubber meets the road as a lot of CapEx is needed to build the new manufacturing equipment for the Cobra process. Am I thinking about this correctly, that the new licensing structure will help create a shared responsibility for developing and also scaling that Cobra process? And does this de-risk the type of maybe wait-and-see type of approach that PowerCo would have taken, because now they have this shared responsibility? Do you see any advantage in that?

Mark, this is a very important consideration on why and how we went with this model. In the relationship that we have developed with PowerCo and in the general capital-light model that we are going after. The designation of B Sample is actually done by the customer. And whether it is B Sample, or when the B Samples are fully qualified from them with the same functionality, they will call the same B Sample, C Samples depending on where they are in their qualification. But the most important thing with respect to your question is this PowerCo Volkswagen commits to spending all the capital to build, ramp, and run the factories. We participate in enabling them to be able to use that equipment very well and produce the cells. We make our money when they run the volumes and we get a royalty prepay when certain progress has been made. On a continuing basis, we'll get royalties and an outperformance as we were talking about it earlier. We are not committing to spend a lot of capital in building and running factories. That's what our partner will be doing. And so going from B Samples to C Samples, et cetera, will be their designation based on their ability to ramp in high volumes.

And if you take a step back from the shareholder perspective, we're amplifying each partner's core competency for QuantumScape, as Siva mentioned that all the knowledge in the chemistry and the process and the cell design development, but from the VW PowerCo, just the expertise in industrialization, automation, automotive scale. We mentioned before over the summer this is a non-exclusive deal and we think it serves as a template for others in the future. The IP is co-owned around industrialization for the separator is always owned by QuantumScape regardless of who creates it. And then, as I discussed in the comments in the letter, it's a major driver to extend our runway. And Mark to your question, once you get to Gigascale factory, it has tremendous benefits to the QuantumScape shareholder in terms of the capital to penetrate our technology into the marketplace.

So we are watching for the shareholder returns and this is the optimum model for us to maximize shareholder returns.

That's great. Thank you both for the information. Just a quick follow-up on that. If PowerCo is responsible for scaling up past C Sample, am I correct in thinking that even if they develop trade secrets or processes around the Cobra process, QuantumScape still retains 100% ownership of that? And I know you're working with other OEMs, so can you immediately apply that knowledge to potential competitors of PowerCo? How does that relationship function?

So on the ownership question is, yes, QuantumScape retains ownership of the separator technology regardless of who creates it in this collaboration phase, regarding the exact details of how it works for use with others, I don't want to get into the weeds of the contract itself. There are limitations, but we think on balance, they're quite favorable to QuantumScape and use with other partners.

But clearly, Mark, our expectation is that we will have multiple customers with whom we'll be ramping as rapidly as possible. And so the contract allows certain features for us to be able to do that. Clearly, there will be some restrictions, but this is a much faster way to do it.

And there are no further questions at this time. QuantumScape management, I'll turn the call back over to you.

Thank you, operator. As a final note today I would like to acknowledge our Co-Founder and Chairman, Jagdeep Singh, who will be retiring from the Board at the end of 2024 after almost 15 years of service. Jagdeep is the visionary behind the growth of QuantumScape leading up to the critical achievement of shipping B Samples of our first commercial product. We are deeply grateful for his inspired guidance and will continue striving towards the ambitious goals he has set for the company. On a personal level, I'd like to express my gratitude to Jagdeep, for continuing to be a great friend and confidant and for his invaluable help as I take on the task of leading this extraordinary company into its next stage. With that, thank you for listening and we look forward to updating you on further progress in the months to come.

This concludes today's conference call. You may now disconnect.